The Oil Crunch Begins To Bite

While much of the financial press has been working to cast the drop in oil prices as 'unambiguously good' for US and global economies, the reality is, well, a lot more ambiguous.

The way the 'good' story plays out is that lower oil prices mean that US consumers spend less on gasoline, diesel and heating oil and therefore have more money to spend on other things.

Our first taste of ambiguity in this story comes from the observation that one person's gain is another's loss. What I mean is that since GDP consists of all spending and production within an economy, if consumers' savings on oil are spent in another sector, that's a dead wash.

Nothing results. We might see a bump in spending on apparel and appliances, but it's offset by less spending at the gas pump. 

The only unambiguous part of the story as it relates to GDP is that to the extent that the US, or any country, is a net importer of oil (and the US is to the tune of some 5.5 million barrels per day) then less money will be spent on those imports. And that boosts GDP (because imports are subtracted from exports in the GDP calculation).

So let's check in on the unambiguous boost to consumer spending before we trundle over to the hits in the oil patch.

The most recent release from the BLS (which we always take with a grain of salt given their proclivity for rosy releases dependably followed by subsequent downward revisions) shows that personal spending tumbled in December 2014 by the most since 2009:

Personal outlays — PCE, personal interest payments, and personal current transfer payments — decreased $39.2 billion in December

(Source)

Now, the idea was supposed to be that consumers would use the gas savings to spend on other things, but so far that's not showing up in the data.  In fact, those crafty consumers used the opportunity to save more instead, taking the savings rate in December to 4.9%, up a hefty 0.6% from November's 4.3% rate.

So much for the hope that the gasoline savings would result in some orgy of spending. At least in December. We'll have to see what the next few months bring.